Big Ideas for Small Business: Short-Term Subsidies to Boost Hiring at Small Businesses

Creating a Subsidized-Employment Program for Small Businesses and Startups

By Stephen Steigleder
Posted on November 17, 2011, 9:00 am

This is the latest installment of a new CAP series called “Big Ideas for Small Business.” The weekly series aims to offer a collection of bold proposals that taken together will form a progressive pro-business agenda for the small- and medium-sized companies—and future big companies—our economic competitiveness depends on.

In this space CAP’s economic policy team will offer a weekly pro-growth alternative to the simplistic conservative advocacy for irresponsible tax policy and unaccountable government that are hardly the real priorities of small businesses—and that will do nothing to boost economic growth and ensure widely shared prosperity.

Small businesses are delaying hiring decisions until the economy is stronger. With a tendency for narrower profit margins, there is increasing evidence that small businesses are wary of hiring workers who have been long-term unemployed. If a small business does post a job opening, it often specifies that unemployed workers need not apply.

Meanwhile, 42 percent of unemployed workers have been out of the labor market for more than six months—close to the highest rate of long-term unemployment on record. Such extended periods of unemployment risk erosion of professional skills, declining health, and financial ruin for unemployed workers and their families.

Recent attempts to bring together small businesses and long-term unemployed workers have been unsuccessful. For instance, one controversial state program, Georgia Works, offers unemployed workers six weeks of unpaid employment in exchange for a $40 weekly stipend to cover personal expenses. Not surprisingly, very few workers have volunteered to participate for such a modest sum. While the Georgia Works model provides obvious benefits to employers, there is no evidence that unemployed workers are served well.

We can do much better than Georgia Works.

The solution: Subsidized employment placements at small businesses

The president has proposed that Congress enact a $4 billion fund to support trial-employment placements for workers who have been unemployed for at least six months. CAP proposes that this program be converted into a $10 billion fund that provides wages, counseling, and support services for workers willing to participate in an eight-week subsidized-employment program.

Subsidized employment should be limited to placements at small businesses and startups, preferably businesses with 50 employees or fewer. Participating employers would face very low costs and minimal risk since the employee’s wages would be paid through the subsidized employment fund.

This program should incorporate important lessons from a recent subsidized employment program—the Temporary Assistance for Needy Families, or TANF, Emergency Fund.

A comprehensive report on the TANF Emergency Fund found that it helped to expand hiring at private-sector businesses and that small businesses gained particular benefit from the program. For instance, two-thirds of participating employers in Illinois had fewer than 15 employees, while some single-person companies were able to bring on their first employee. The TANF Emergency Fund also supported Mississippi’s New Start program that provided up to $5,000 to individuals to start their own businesses.

Subsidized-employment programs can be successful because they enable employers to evaluate potential new hires through a no-cost (or low-cost) trial-employment period. In the current economic recovery, employers are wary of hiring new workers and there is evidence that they are especially wary of hiring the long-term unemployed. By subsidizing potential new hires for eight weeks, subsidized-employment programs can drastically reduce an employer’s exposure to short-term risk, prompting them to offer an opportunity to an unemployed worker that would not otherwise be available.

In a best-case scenario, a participant spends their eight-week employment period learning new job responsibilities and demonstrating a strong work ethic, trustworthiness, and an ability to contribute to the team. The small business or startup decides the participant is a good investment and adds the participant to the payroll. It’s a good deal for all. The unemployed worker gets a job; the small business or startup gets a new, dependable employee; the federal government saves money on unemployment benefits; and the local economy grows.

A federally funded subsidized employment program should include

Eight-week subsidized-employment placements that pay at least the minimum wage

Career-counseling services for participants

Support services such as child care and transportation for participants

Basic workplace protections such as workers’ compensation

A guarantee that federal unemployment benefits will be “temporarily suspended” for a worker who voluntarily enrolls in a trial-employment period; the worker should not lose access to their unused federal unemployment benefits if he or she isn’t hired full time

Participating small-business employers should be required to provide

Placements that offer at least 20 hours per week of employment

Certification that a long-term job opening exists

Next steps: A subsidized employment bill

The Obama administration has repeatedly expressed its desire to work with congressional leaders on legislation to boost job growth. The administration has been willing to focus on smaller jobs bills that are more likely to garner bipartisan support.

Prominent members of both parties—including President Barack Obama, former President Bill Clinton, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), and former Massachusetts Gov. Mitt Romney—have publicly expressed support for programs that temporarily subsidize private-sector employment.

The president should work with congressional leaders to draft a standalone jobs bill to support subsidized-employment programs for long-term unemployed workers. The fund should allocate $10 billion to states through a population-based formula. The bill should require that subsidized-employment programs pay real wages, include basic workplace protections, and provide a legitimate opportunity for unemployed workers to earn a job. And the program should be limited to small businesses and startups—the drivers of long-term job growth. Beyond those basic criteria, each state should have maximum flexibility to design its own program.

A $10 billion subsidized-employment fund could create employment opportunities for as many as 2 million long-term unemployed workers, while helping more than a million small businesses. It’s time for Congress to get serious about putting people back to work.

Stephen Steigleder is a Policy Analyst at the Center for American Progress.